Storing big quantities of energy products — gas, oil or even electricity — for later consumption is expensive and a logistical nightmare. However, energy consumers and producers have a desire to lock in the price today for energy that they need to use or produce in the future.
Therefore, in energy markets, it is common to trade in so-called forwards or futures. In both cases, the delivery of the energy and the payment happens in the future while the price is set today. Depending on the actual delivery period of the energy product, the price of every forward is slightly different. In certain market scenarios, the price of the forwards that have a sooner delivery is lower than the price for the more distant forwards. But it could also be the opposite.
A forward curve is basically an array of forward prices for a certain market.
Depending on the market, forward prices can change many times per hour, so a forward curve is always a snapshot of the market prices at a certain time. As such, it is different from a price forecast.
Look out for our next blog in this series where we will discuss why companies need forward curves.